Economics Monopolistic Competition Questions
In the short-run equilibrium of a firm in monopolistic competition, the firm maximizes its profit by producing at a level where marginal revenue (MR) equals marginal cost (MC). However, unlike in perfect competition, the firm operates with some degree of market power and faces a downward-sloping demand curve.
At the short-run equilibrium, the firm's price is higher than its marginal cost, indicating that it is earning positive economic profit. This is because the firm's product is differentiated from its competitors, allowing it to charge a higher price. The firm also operates with excess capacity, producing at a quantity lower than the one that minimizes average cost.
In this equilibrium, the firm faces competition from other firms in the market, but it has some control over its price due to product differentiation. The firm's demand curve is relatively elastic, meaning that a small increase in price would lead to a significant decrease in quantity demanded.
Overall, the short-run equilibrium of a firm in monopolistic competition is characterized by the firm maximizing profit by producing at the level where MR equals MC, charging a price higher than marginal cost, and operating with excess capacity.